the truth about avm compliance with interagency guidelines · xvii. (b) portfolio collateral risk...
TRANSCRIPT
The Truth About AVM Compliance with Interagency Guidelines
April 19, 2011
Understanding the New Interagency Guidelines
© 2011 FNC, Inc.
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Conference Web Page
• Today’s PowerPoint
• Audio
• Questions
Slide 3
b1 Change to reflect new cover page.bdabney; 4/19/2011
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Program Overview
• Overview of the Interagency Guidelines
• Selecting, evaluating, deploying and monitoring automated valuation models (AVMs) and setting policies
• Using AVM’s alone and as part of evaluations while meeting compliance with the Interagency Appraisal and Evaluation Guidelines
• Questions
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Speakers
• Jacqueline Doty• Vice President, Collateral Strategy CoreLogic
• Bryan Horn• Product Manager, Automated Valuation Products, LPS
Applied Analytics
• Lee Kennedy• CEO/Managing Director, AVMetrics, LLC
• Neil Olson• Chief Legal Officer, FNC, Inc.
Neil OlsonChief Legal Officer, FNC, Inc.
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Quick Facts on Interagency Guidelines
• Interagency Appraisal and Evaluation Guidelines• Published in the Federal Register on Dec. 10, 2010,
75 FR 77450• Effective on publication • Rescinds
• 1994 Interagency Appraisal and Evaluation Guidelines• 2003 Interagency Statement on Independent Appraisal and
Evaluation Functions• Interagency Statement on the 2006 Revisions to USPAP
• Still Effective• 2005 Interagency FAQs on Residential Tract Development• 2005 FAQs on the Appraisal Regulations and the Interagency
Statement on Independent Appraisal and Evaluation Functions
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Quick Facts on Interagency Guidelines
• Interagency Guidelines are issued jointly by• Office of the Comptroller of the Currency, Treasury
(OCC);• Board of Governors of the Federal Reserve System
(FRB);• Federal Deposit Insurance Corporation (FDIC);• Office of Thrift Supervision, Treasury (OTS); and• National Credit Union Administration (NCUA)
• IAG applies to all institutions regulated by these entities.
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Interagency Guidelines v. Interim Final Regulations
• How are the Interagency Guidelines different from the Interim Final Regulations?• Interim Final Regulations, issued by the Federal
Reserve Board on Oct. 18, 2010 arise from the Appraisal Independence requirements in Title XIV, Subtitle F of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank)
• Interim Final Regulations apply to Consumer Credit Transactions, that is “consumer credit transaction secured by the principal dwelling of the consumer,” not all real estate related transactions
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Interagency Guidelines v. Interim Final Regulations
• Interagency Guidelines arise from the appraisal regulations written under Title XI of the Financial Institutions Recovery, Reform, and Enforcement Act of 1989 (FIRREA)
• Title XI, the appraisal regulations and the Interagency Guidelines apply to all “federally related transactions” which is much broader than consumer credit transactions (“consumer credit transaction secured by the principal dwelling of the consumer”)
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What is a Federally Related Transaction?
• Federally related transaction — any real estate-related financial transaction which:• (A) a federal financial institution’s regulatory agency or the Resolution
Trust Corporation engages in, contracts for, or regulates; and • (B) requires the services of an appraiser.
• Real estate related financial transaction means any transaction involving: • (A) the sale, lease, purchase, investment in or exchange of real
property, including interests in property, or the financing thereof; • (B) the refinancing of real property or interests in real property; and • (C) the use of real property or interests in property as security for a loan
or investment, including mortgage-backed securities.
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XI. Transactions that Require Evaluations
• The Agencies’ appraisal regulations permit an institution to obtain an appropriate evaluation of real property collateral in lieu of an appraisal for transactions that qualify for certain exemptions. These exemptions include a transaction that:
• Has a transaction value equal to or less than the appraisal threshold of $250,000.
• Other transactions (e.g. business loans under $1 million)
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XII. Evaluation Development
• An evaluation must be consistent with safe and sound banking practices and should support the institution’s decision to engage in the transaction. • “An evaluation
• whether prepared by an individual or supported by an analytical method or a technological tool,
• provides a reliable estimate of the collateral’s market value as of a stated effective date”
• BPO would not qualify if it only produces a likely sales price—needs to estimate market value
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XII. Evaluation Development
• “A valuation method should address the property’s actual physical condition and characteristics as well as the economic and market conditions that affect the estimate of the collateral’s market value.”
• “It would not be acceptable for an institution to base an evaluation on unsupported assumptions, such as a property is in ‘‘average’’ condition, the zoning will change, or the property is not affected by adverse market conditions.”
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XII. Evaluation Development
• Actual Conditions. “An institution should establish criteria for determining the level and extent of research or inspection necessary to ascertain the property’s actual physical condition, and the economic and market factors that should be considered in developing an evaluation.”• “An institution should consider performing an
inspection to ascertain the actual physical condition of the property and market factors that affect its market value.”
• “When an inspection is not performed, an institution should be able to demonstrate how these property and market factors were determined.”
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XIII. Evaluation Content
• “An evaluation should contain sufficient information detailing the analysis, assumptions, and conclusions to support the credit decision. An evaluation’s content should be documented in the credit file or reproducible.”• There are eight minimum requirements, some of
which are new since the 1994 Interagency Guidelines, including one related to the use of analytical methods.
• This is the basic checklist you must always follow—but it can start with an AVM.
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XV. (B) Depth of Review
• Automated Tools. “With prior approval from its primary Federal regulator, an institution may employ various techniques, such as automated tools or sampling methods, for performing pre-funding reviews of appraisals or evaluations supporting lower risk residential mortgages.”
• “When using such techniques, an institution should maintain sufficient data and employ appropriate screening parameters to provide adequate quality assurance and should ensure that the work of all appraisers and persons performing evaluations is periodically reviewed.”
• “In addition, an institution should establish criteria for when to expand the depth of the review.”
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XVII. (B) Portfolio Collateral Risk
• “Consistent with sound collateral valuation monitoring practices, an institution can use a variety of techniques for monitoring the effect of collateral valuation trends on portfolio risk.”
• “Sources of relevant information may include external market data, internal data, or reviews of recently obtained appraisals and evaluations.”
• “An institution should be able to demonstrate that it has sufficient, reliable, and timely information on market trends to understand the risk associated with its lending activity.”
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XVII. (C) Modifications and Workouts of Existing Credits
• (Since it is not a new transaction) “an institution would not be required to obtain either a new appraisal or evaluation to comply with the Agencies’ appraisal regulations, but should have an understanding of its collateral risk.
• For example, institutions can use automated valuation models or other valuation techniques when considering a modification to a residential mortgage loan.”
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Appendix B: Evaluations Based on Analytical Methods or Technological Tools
• Since the 1994 Guidelines, the emergence of analytical methods (such as AVMs) has profoundly altered the valuation of collateral. Appendix B is a thorough discussion of the Agencies’ views on how institutions may use analytical methods and technological tools. Here are highlights, but read this Appendix carefully.
• “The Agencies’ appraisal regulations permit an institution to use an evaluation in lieu of an appraisal for certain transactions. An institution may use a variety of analytical methods and technological tools for developing an evaluation, provided the institution can demonstrate that the valuation method is consistent with safe and sound banking practices and these Guidelines (see sections on Evaluation Development and Evaluation Content).”
• An institution should establish policies and procedures that provide a sound process for using various methods or tools.
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Appendix B: Evaluations Based on Analytical Methods or Technological Tools
• An institution should establish policies and procedures that provide a sound process for using various methods or tools. Such policies and procedures should:
• Ensure staff has the requisite expertise and training to manage the selection, use, and validation of an analytical method or technological tool. If an institution does not have the in-house expertise relative to a particular method or tool, then an institution should employ additional personnel or engage a third party.
• Address the selection, use, and validation of the valuation method or tool.
• Establish criteria for determining whether a particular valuation method or tool is appropriate for a given transaction or lending activity, considering associated risks. These risks include, but are not limited to, transaction size and purpose, credit quality, and leverage tolerance (loan-to-value).
• Specify criteria when a market event or risk factor would preclude the use of a particular method or tool.
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Quick Summary on AVMs
• Professional driver on a closed course! Do not attempt on your own.
• Federal regulators recognize that AVMs can be a valuable tool, but: • You need to have some knowledge and expertise in
testing, evaluating, selecting, setting policies around how you will deploy and when.
• If you do not have expertise, you need to seek it from outside third parties
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Quick Summary on AVMs
• Federally Related Transactions• A transaction requires an appraisal or
evaluation.• Not everything is a transaction, which means
an AVM can be used where appropriate when not supporting a specific transaction, such as:
• Modification, reviews, portfolio review, likely equity in property, marketing, and so on.
• AVM can also be used as foundation for an evaluation.
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Quick Summary on AVMs
• Evaluations using AVMs• An AVM by itself is not an evaluation, but can
serve as the foundation for an evaluation• Evaluation has eight elements set out in the
Interagency Guidelines• An evaluation needs some reflection of
“actual physical condition” (assuming average condition is no longer sufficient)
• But you do not need to perform an inspection to establish the physical condition
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Quick Summary on AVMs
• Now, let’s hear from our panelists about how to: • Develop expertise on the use of models
(selecting, evaluating, deploying and monitoring) and setting policies.
• How you can use AVMs across your institution (both by themselves and as part of evaluations) and still comply with the Interagency Appraisal and Evaluation Guidelines
Lee KennedyCEO/Managing DirectorAVMetrics, LLC
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Appendix B-(Interagency Guidelines)
• An institution should establish policies and procedures that provide a sound process for using various methods or tools. Such policies and procedures should: • Ensure staff has the requisite expertise and training to manage
the selection, use, and validation of an analytical method or technological tool. If an institution does not have the in-house expertise relative to a particular method or tool, then an institution should employ additional personnel or engage a third party.
• Address the selection, use, and validation of the valuation method or tool.
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Appendix B-(Interagency Guidelines)
• Professional driver on a closed course! Do not attempt on your own.
• Federal regulators recognize that AVMs can be a valuable tool, but: • You need to have some knowledge and expertise in
testing, evaluating, selecting, setting policies around how you will deploy and when.
• If you do not have expertise, you need to seek it from outside third parties
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AVM Use (When and Where)
• You can still use AVMs or BPOs as a (1) supplement to an appraisal or (2) in situations in which the Guidelines recognize an appraisal to be impractical or (3) where an appraisal is not required (i.e. portfolio monitoring).
• AVMs are given substantial discussion in the Interagency Guidelines - VALIDATING their use
• Basic AVM guidelines did not change; AVMs can be used for some originations when used in conjunction with additional tools.
• An AVM by itself is not solely sufficient if it does not addressproperty condition.
• AVMs must comply with “safe & sound” banking practices.• AVMs are often recommended as a best practice (e.g. Freddie
Mac Bulletin 2009-18).
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AVM Use (The Box)
• Let’s talk for a minute about AVM’s in the origination space and why they should not present any additional collateral risk over the traditional appraisal process…. I call this prudent use of AVM’s the “Best Practices” BOX…. This box is designed by the guidelines (and best practices). This box defines the area in which AVM’s are allowed to operate and it is fairly small in comparison to the traditional appraisal products. Let’s go though the basic qualification criteria that makes up the walls of our AVM box…
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AVM Use (The Box)
• The main qualifier is the deminimus level (Currently set at $250,000 or below)
• Higher qualifying credit score (Than would be required for “valuations)
• Loan programs restrictions (lower LTV, portfolio, GSE PIW Programs)
• Market condition restrictions (No adverse conditions, flood, hurricane, fraud, etc….)
• Property type restrictions (No manufactured housing, 2-4 units, high rise Condo’s, etc..)
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AVM Use (The Box)
• AVM acceptance thresholds• Confidence Score (or FSD) • Valuation Floor (below which and AVM will not be accurate
enough)• Valuation Ceiling ( above which and AVM will not be accurate
enough)• Acceptable Value Variance Range ( from a stated value)
With a combination of these parameters your custom AVM BOX will contain properties that are very conforming and with negative property physical / market condition factors that are substantially minimized.
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New rules to use AVMs?
• When do I need to verify actual (current) physical condition?• No set circumstances
• How do I verify condition?• Appraisal • Home Inspection• BPO• Condition Report
• What are acceptable proxies (i.e. “research”) for condition inspections?• Recent appraisal or BPO report?• How far back in time are on-site valuations considered “current”?• “Recent” record of property on MLS with subject property photos?
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Lender Responsibilities for AVM Use
• Lenders are ultimately responsible for all third-party arrangements and should maintain the expertise and resources for proper oversight.
• Valuation providers who are stepping up compliance and/or maintaining high standards of QC should serve to enhance the valuation process for a lender partner – not replace it.
• Interagency Guidelines are very clear that lenders are responsible for any valuation outsourcing – this includes AMCs, BPOs, AVMs, consultants, third-party reviewers and others.
• The lender still holds ultimate responsibility with the regulator to make sure proper controls and independence are in place.
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OCC 2011- 12 Guidance on Model Risk Management
• Section V Model Validation:• “rigor and sophistication of validation should be commensurate
with the bank’s overall use of models”• “generally, validation should be done by people who are not
responsible for development or use and do not have a stake in whether a model is determined to be valid”
• Individuals doing validation should have a significant degree of familiarity with the line of business using the model and the model’s intended use.
• Key Elements of Comprehensive Validation:1. Evaluation of conceptual soundness, including developmental
evidence2. Ongoing monitoring, including process verification and
benchmarking3. Outcomes Analysis, including back-testing
Jacqueline DotyVice President, Collateral Strategy CoreLogic
Establishing Policies to Determine the Proper Valuation Product
Various factors must be considered in determining whether an AVM is an appropriate choice, including:
• Overall AVM Performance (including “tail risk”)• Minimum internal confidence score for when an AVM may
be used• Where the AVM’s tolerance is outside a specified range
• Ability to preclude value shopping when more than one AVM is used for the same property
• Prevalence of mortgage fraud in the vicinity of the subject property
• Occurrence of natural disasters or major economic events• An atypical property relative to the neighborhood
AVM Performance
Platform Structure
Exclusionary Criteria
AVM Performance
• CoreLogic makes AVM performance information available on our AVM cascades and our four lender-quality AVMs (PASS, ValuePoint4, PowerBase6, HPA).
• We also encourage lender validation testing using the lender’s pipeline.
Guideline CoreLogic’s ResponseOverall AVM Performance (including “tail risk”)
Reports show overall performance metrics such as median error, and tail risk metrics such as >20%.
Minimum internal confidence score for when an AVM may be used
CoreLogic has established a minimum confidence score cutoff of FSD = 25 (FSD = forecast standard deviation; we have documentation on this too).
Where the AVM’s tolerance is outside a specified range
We produce reports by state and for the largest counties.
Platform Structure
Precluding value shopping:• Lenders must have both policies and systems to ensure
that the highest value is not automatically chosen.
Guidelines CoreLogic Response
No value shopping None of the CoreLogic platforms automatically pull multiple values and return the highest value.
Exclusionary Criteria
Lenders must have policies to determine the circumstances under which they should NOT use an AVM.
Guidelines CoreLogic ResponsePrevalence of mortgage fraud in the vicinity of the subject property
LoanSafe Collateral Manager is our most sophisticated tool for detecting collateral-based risk. HistoryPro is also an option.
Occurrence of natural disasters or major economic events
Some CoreLogic AVMs are returned with natural disaster indicators. Lenders may use Vector to pre-screen for natural disasters.
An atypical property relative to the neighborhood
A property condition report can identify atypical properties.
Testing and Monitoring
• “An institution should establish standards and procedures for independent and ongoing monitoring and model validation, including the testing of multiple AVMs, to ensure that results are credible.”
• CoreLogic does produce significant reports on our AVM performance, but…
• “An institution should not rely solely on validation representations provided by an AVM vendor.”
• Institutions must do their own validation testing based on their pipeline, or contract with a third party for validation services.
Documentation from AVM Providers
• You should ask for:• Technical details on models and data, including use of
MLS data in the model;• Details on internal testing approach and results;• Quarterly updates on model performance; and• If using a cascade, technical details on testing,
cascade build and cascade performance.
CoreLogic provides all of the above documentation to clients using our AVMs and AVM cascades.
Property Inspections with AVMs
• We are developing a Property Condition Report specifically tailored to the new Guidelines. This new product is targeted for rollout in the second quarter.
• Our current product line includes ValueView, an AVM plus inspection.
ValueView Sample
ValueView Sample
Review Processes
• Institutions are expected to adopt a risk-focusedapproach for reviewing appraisals and evaluations prior to the final credit decision
• CoreLogic’s LoanSafe Collateral Manager is ideally suited to stratify appraisals by risk to the organization. Other options for risk-based reviews:• HistoryPro• Checking appraisals against AVMs
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Portfolio Monitoring
• “Prudent portfolio monitoring practices include criteria for determining when to obtain a new appraisal or evaluation…The criteria should address… changes in market conditions.” “An institution should be able to demonstrate that it has sufficient, reliable, and timely information on market trends to understand the risk associated with its lending activity.”
• CoreLogic product options to help address portfolio monitoring requirements:• Market Trends
• Monthly zip-level market trends based on home sales, home prices, foreclosure filings, and mortgage performance.
• Portfolio updates using our AVMs or index values
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Additional Resources
• To learn more about our industry-leading AVM performance and modeling standards, download our AVM white papers at: www.corelogic.com/Products/GeoAVM-Cascade-Suite.aspx
• For more information, contact Jacquie Doty at [email protected] or by phone at 703-610-5415
Bryan HornProduct ManagerAutomated Valuation ProductsLPS Applied Analytics
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XII. Evaluation Content
• A valuation method should address the property’s actual physical condition and characteristics as well as the economic and market conditions that affect the estimate of the collateral’s market value…average condition assumption no longer sufficient
• A valuation method that does not provide a property’s market value or sufficient information and analysis to support value conclusion is not acceptable as an evaluation…no sales or list price such as BPO
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XIII. Evaluation Content
• Provide an estimate of the property’s market value in its actual physical condition, use and zoning designation as of the effective date of the evaluation…with any limiting condition
• Describe the method(s) the institution used to confirm the property’s actual physical condition and the extent to which an inspection was performed.
• Describe the analysis that was performed and the supporting information that was used in valuing the property
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Obvious Solution; Bundle Inspection Report with AVM
• Property Condition Report• Inspection performed by
licensed real estate agent• Condition observations of
subject property• Neighborhood influences• Photos
• When inspection indicates inferior condition or damage, will you reduce value?
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Shortfalls of Inspection + AVM Solutions
• Recycled Solution– Simply bundles AVMs with a separate property
condition report– Falls short by failing to factor the property condition
information into the property value– Requires manual review of the property condition
report and manual update to the AVM-produced value– Increases potential for judgment errors, requiring
additional supervision and review– Manual process negatively impacts both cost and
time
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Condition Adjusted Models
• Property condition observations from the PCR are fed into the valuation engine and influence the value conclusion.
• Condition Adjusted Model provides all the information in one report; not two separate products bundled together (AVM + Inspection).
• No manual review of condition report with possible value adjustment to AVM, opening the door for judgment errors, requiring additional supervision and review.
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Condition Adjusted: A Better Solution…
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Why Condition Adjusted Models are Better
• ValueSure Condition Adjusted models offer mortgage lenders a single report that meets the minimum criteria of an Evaluation as defined by Interagency Guidelines.• AVM that provides a condition adjusted value
conclusion• Inspection of subject property condition• Market and neighborhood trend information
• Truly satisfies the spirit and intent of the Interagency guidance, provide a value that takes condition of property into account.
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• For more information call 866-964-8343
• Bryan Horn, Product Manager
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Questions
• Today’s Questions• Chat function• [email protected]
Neil Olson, Chief Legal [email protected]
www.fncinc.com
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Thank You
• Questionnaire
© 2011 FNC, Inc.